LONDON (MNI) – Bank of England Deputy Governor Ben Broadbent hit back against the idea of merging monetary and macro-prudential policy making, saying that the evidence is that the two have little effect on each other.
Broadbent, in a speech Thursday at the Reserve Bank of Australia, also argued that if the BOE’s monetary and financial policy committees were merged, the joint committee would tend to prioritise the former, where success is easier to measure, at the expense of the latter.
He said it was wrong to assume that macro-prudential tools, designed do such things as boost Bank capital and curb high risk lending, had a significant impact on key variables for monetary policy. Conversely monetary policy changes had little effect on financial stability.
A recent study found “that monetary policy has relatively weak effects on financial stability, at least in the UK” but also, in part because they are directed at reducing tail risks, “macro-prudential policies do not have very large effects on demand and inflation,” Broadbent said.
A 100 basis point increase in the key policy rate, for example, will typically lower output and inflation by more than 0.5 percentage point while on the macro-prudential side a 100bps increase in banks’ counter-cyclical capital buffers would knock just 0.1 pp off growth and next to nothing off inflation.
So the spill-overs between macro and monetary policy are not large. Broadbent said the evidence was that even hefty increases in Bank Rate before the financial crisis would have done little to reduce banks’ balance sheets and improve financial stability.
“The gains from formal co-ordination might not be that significant,” Broadbent said.
–HARD TO MEASURE
He also noted that the success of policies designed to improve financial stability are hard to measure — statistically it would be impossible to say if any reduction in the frequency of financial crisis over relatively short-time periods was more likely due to policy setting or dumb luck.
Under these circumstance a policymaking committee charged with both financial stability and monetary policy would tend to focus on the latter where success is far simpler to measure – the achievement of the inflation target.
Broadbent’s speech was a defence of current arrangements in the UK, where two separate committees, the Financial Policy Committee and the Monetary Policy Committee, operate under the BOE’s roof, with separation of powers and both answerable to parliament.
His speech contained no comments on the current monetary policy conjuncture.
By David Robinson
THURSDAY, APRIL 12, 2018 – 02:30
–MNI London Bureau; tel: +44 203-586-2223; email: email@example.com